Will SaaS Emerge as a Big Winner Postrecession?

Few will argue with the idea that in a time of tight budgets, pared-down IT departments, and slashed staffs, it’s imperative to do more with less and adopt efficient, streamlined, and easy-to-use solutions. The tanking of the economy last September may ultimately prove a boon to the software-as-a-service (SaaS) model, where ease of use and little need for tech support are major selling points.

The SaaS model is equally compelling for the control it places in the hands of the client. "This model is powerful from the customer point of view because the vendor doesn’t get all of their money up front," says Bruce Felt, CFO of SuccessFactors, Inc., which provides on-demand employee and talent management solutions. "That pretty much forces the supplier to make sure the client likes it, uses it, and gets value out of it. The power stays with the buyer and it keeps us honest, so to speak."

SuccessFactors is coming off a winning 2008. It announced revenues of $33 million in 4Q—higher than its prior guidance of $31 million–$31.5 million—and the company projects roughly 30% year-over-year growth in 2009.

"For several years, organizations have been learning about software as a service—it’s been kind of a learning curve up until this point, but the economy we’re in right now may drive implementation," says Tim Low, vice president of marketing for privately held Daptiv, a provider of on-demand project management and collaboration solutions.

Daptiv commissioned a study by Forrester Research, Inc. to evaluate the "Total Economic Impact (TEI) of Daptiv PPM" (project portfolio management), which concluded that clients break even on their investment in less than 2 months and realize a risk adjusted 3-year ROI of 143%. Although specific to the Daptiv solution, the study noted the dramatic cost savings and productivity gains of the SaaS model in general.

According to consultant Michelle Salazar, Forrester prefers the more conservative, risk-adjusted figures. "We’re always putting conservative factors in because as far as we’re concerned, if you can show a positive ROI by having a very conservative estimate then that already is a strong business case," she says.

Joe Panettieri, editorial director of Nine Lives Media, Inc., a company that tracks the SaaS 20 Stock Index, says he sees three key trends influencing the SaaS industry right now: Amazon.com’s web services platform, Google Apps, and moves that Microsoft is making in the market. Panettieri says he expects that Amazon will be "a dominant but open force in cloud computing," while he calls the Google Apps Reseller program, which launched in January, "an experiment to see how SaaS applications are purchased (or rented) with multiple parties involved." As for Microsoft, Panettieri says, "As Microsoft launches Azure and other SaaS/cloud services, the company will both compete and cooperate with its traditional IT partners. That is making some partners nervous, but Microsoft really has no choice in the matter since the company needs to compete more directly with Salesforce.com, Google, and other SaaS providers."

Although the SaaS 20 Stock Index fell 21.6% in 4Q 2008, that is roughly on par with the S&P 500’s performance over the same period. "Demand for SaaS continues to grow—with companies such as Blackboard and RightNow recently announcing quarterly earnings that impressed Wall Street. It’s really a matter of SaaS companies setting expectations appropriately. On the one hand they want to show growth, but they must also strike a more conservative tone in order to meet Wall Street’s ongoing expectations," says Panettieri.

While it’s too soon to tell, another contributing factor to the success of SaaS could be the Obama administration’s plan and what the president has referred to as "tax giveaways to companies that ship our jobs overseas." If it becomes less financially advantageous to outsource tech support to companies operating outside the U.S., shifting to SaaS solutions could help companies shave IT costs. The offshore outsourcing market has already been hit, as Rod Bourgeois, a technology services specialist at Sanford C. Bernstein & Co., told The New York Times in January that what was a $50 billion-a-year business growing at 29% annually has been slowed to a roughly 10% forecasted growth this year, due in large part to the credit crisis. Good news, perhaps, for SaaS providers.